The Lin ink Between Retir irement Security and Long-Term Care (Hi (High ghlig ights fr from Soc ocie iety of of Actu ctuaries es Mon onograph) Ge Gerontologic ical l Soci Society of of America Pre resented by Caro Carol l Bo Bogosia osian, AS ASA John John Cutl Cutler, Es Esq. Sa Sandra ra Timm Timmermann, EdD Ci Cindy y Ho Hounsell, l, JD JD November 20, 2015
Agenda • Introduce Society of Actuaries (SOA) Committee on Post-Retirement Needs and Risks (CPRNR) • Present Highlights of Long-Term Care Papers in SOA Monograph “Managing the Impact of Long -Term Care Needs and Expense on Retirement Security” • Retirement Issues – Carol Bogosian • Insurance Issues – John Cutler • Family and Housing Issues – Sandy Timmermann • Discussant – Cindy Hounsell • Advance Knowledge on Link Between Retirement Security and Long-Term Care (LTC), as well as Family and Caregiving 2
Background by Carol l Bogosian
Long-Term Care and Retirement Security: What Are the Issues? • Cost of a major long-term care event: depletes retirement assets for families who purchase services • Impact on the financial security of the surviving spouse • Added responsibility and financial burden placed on caregiving family members • Health and long-term care costs over what is planned for, and they outpace general inflation • Increased longevity: greater likelihood of needing care – especially for women in older ages • Limited participation by middle income earners in the private insurance market • Societal impact of an aging population on Social Security, Medicare, and Medicaid 4
SOA Post-Retirement Needs and Risks Committee • Society of Actuaries sponsored post-retirement risk research accumulated for nearly 20 years • Members: Broad range of expertise from various fields • Overall program goal: Understand and improve post- retirement risk management • Focus on middle income market age 50 and older • Housing value is largest financial asset for many • Many lack adequate assets to maintain living standard • Decisions will require trade-offs on living standards • Balance focus on understanding public action, solutions • Focus on multiple-stakeholders 5
Paper Call: Managing the Impact of Long-Term Care Needs and Expense on Retirement Security: A Holistic and Multi-Generational View • Call for papers issued in 2013 • 12 papers received are listed in the Appendix • Key topics: • Big Picture • Caregiving, Family, Health • Insurance • International • Ideas for the Future • All papers published in monograph on the SOA website https://www.soa.org/Library/Monographs/Retirement-Systems/managing-impact- ltc/2014/mono-2014-managing-ltc.aspx 6
Questions Addressed by Papers • How can individuals and families protect themselves from the expense of LTC needs? • How can they protect against potential financial ruin? • How can advisors help their clients improve decision making? • Are there better ways to frame and communicate challenges and possible solutions? • Are there better product designs (private and public)? • Are there alternative financial approaches? • How can individuals and families finance LTC needs while addressing basic retirement income needs and asset protection? 7
How to Find SOA Research Reports and More Information • All CPRNR research is available on the SOA website at – http://www.soa.org/research/research-projects/pension/research-post- retirement-needs-and-risks.aspx • For more information about SOA Research – contact SOA Research Actuary Steve Siegel at • 847-706-3578 • ssiegel@soa.org • For information about the Post-Retirement Needs and Risks Committee – contact Anna Rappaport, Chairman at anna@annarappaport.com or Carol Bogosian at cbogosian@aol.com 8
Research Hig ighli lights: Retirement Is Issues by Carol l Bogosian
The Im Impact of LTC Costs on Retir irement Wealth Needs Fin inancin ing LTSS and Long Lif ife through More Fle lexible 401(k)s and IR IRAs
The Impact of LTC Costs on Retirement Wealth Needs • Authors: Vickie Bajtelsmit & Anna Rappaport • Background on retirement and long-term care • Discusses impact on women • Sets up four methods for private financing of long- term care • Presents simulation research from SOA Retirement Adequacy Study • Provides areas for further research 11
Background • Major LTC event can devastate retirement security for most households. For households below median who need an extended stay in nursing home, Medicaid is probably only viable option. • Major private methods of financing LTC include insurance, savings, CCRCs, and use of home equity. Can be combined. • None of these match needs perfectly. Some have better chance than others. • Longest lived people most likely to have major needs. • By age 80, 1/3 have some disability and by 86, majority have disability. • Women have greatest challenges. 12
Four Options for Financing Care In Insu suran ance Sa Savi vings CCRC Hou Housing Equity ity Prevalence <10% 15% of care Low, higher Little use of paid out-of- net worth reverse pocket only mortgages When to do While still Ongoing – Time of When healthy all ages entry and needed monthly Match to Depends on No direct Depends on No direct needs contract, match contract, match situation situation Applies to Middle and Higher Higher net All levels upper income and worth who own income net worth home 13
Four Options for Financing Care (Cont’d) In Insu suran ance Sa Savi vings CCRC Ho Housing Equity ity Risks Premium Investment risk, Monthly costs Equity increases, costs may not have can increase, unmatched to exceed limits, enough money, bankruptcy risk, need, illiquidity, situation not difficulty of don’t know if interest rates covered managing assets needs covered affect reverse mortgages Costs no LTC Premiums paid Non By-in price, None need higher monthly premiums Issues for Reduced risk of Survivor may not Security of Survivor may not surviving spouse asset depletion have enough CCRC, higher have enough assets left monthly costs; assets left possible relocation Taxation Some policies Most retirement Par of price = Gain on sale of tax advantaged savings tax insurance house often tax deferred premium free 14
Building Long-term Care into Stochastic Retirement Model EB EBRI I Model SO SOA Reti tirement Ade dequacy Stu Study • • Aggregate approach Individual approach • • Focuses on entire population Focuses on sample individuals near • Identifies % of population who will the middle • not have enough money Estimates how much money a household needs for retirement success Bot Both Stu Studies: • Sho Shocks s includin ing long-term car are ar are e important • Lon Long-term care is s a a majo ajor fac actor in n inadequate asse assets ts 15
SOA Study: Effect of LTC Insurance on Retirement Adequacy Wealth Needed at Retirement in 000s Base Case Base Case: Buy LTCI Buy CI for or Bot Both No o LTCI Spo Spouses Buy Buy LTCI CI for or Wif ife Median family Wealth at retirement: $170 $227 $195 50 th percentile Wealth at retirement: $686 $333 $338 95 th percentile 75% 75% fam amil ily Wealth at retirement: $544 $599 $581 50 th percentile Wealth at retirement: $1,011 $851 $871 95 th percentile Median family: $60,000 income and $100,000 non-housing wealth 75% family: $105,000 income and $250,000 non-housing wealth 16
Conclusions • EBRI and SOA-RA models include long-term care and health risk in broader retirement simulation models. Many models exclude these risks. • Results are very different when these risks are included. Huge differences between 50 th and 95 th percentile because of shocks. • If stochastic modeling does not include LTC, point out limitations and be careful how used. • Planning strategies like changing retirement age or reducing spending help at the median but can’t handle the full impact of shocks. • Advance planning for LTC very important for low and middle income households • LTC insurance can be useful for those in middle-income brackets. 17
Financing LTSS and Long Life through More Flexible 401(k)s and IRAs • Author: Karl Polzer • Proposes and evaluates changes to 401(k) and IRS rules • Would allow a portion of contributions to be designated to pay LTSS • Does not evaluate impact on Medicaid • Can be combined with other methods 18
Background • DC plans involve longevity risk • Inflation erodes savings, especially as life expectancy increases • LTC costs may not be covered by Medicare or Medicaid • Distribution of LTC expenses is highly skewed • LTCI coverage can be denied based on health status • Most policies have a set dollar limit for expenses • DC plans have MRD rules 19
Public Policy • New IRS rule: Can use up to 25% of account balance (or $125,000, if less) to buy longevity annuity • Allow segregation or transfer from DC plan to special LTSS/longevity IRA • Defer MRD/taxation to later of fixed age or death • Create tax incentives for funds used to pay for LTSS or LTCI • Provide retirement planning education • Set limit on special account contributions but not earnings 20
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